When selling an accounting practice ...

When selling an accounting practice, one of the most important things to get right is the retention sum.

As a solicitor, I have worked for over 15 years for one of Sydney’s most successful accountancy brokerage firms. During that time I learned a thing or two about how the sales of accountancy practices pan out and the types of issues that often arise.

One of the curliest is the retention sum; particularly when (or if) it is paid when the time comes.

Most sales of accountancy practices allow the buyer to delay payment of 10 per cent to 20 per cent of the purchase price for 1-2 years until the revenue from the practice is proven. So either one year after the sale or both one year and two years after the sale the buyer owes the seller the final payments, which can be adjusted down if the revenue from the practice has not reached the previous levels represented by the seller.

There are a number of issues that regularly lead the buyer to refuse to pay the retention sum when the time comes. They are generally packaged up under the claim that the practice did not reach the warranted revenue, but the real issue is why. There can be a number of reasons.

1. Often it is because buyers think they are simply buying a job and don’t understand that running your own practice requires much more than just doing the work; you must be seriously committed to sales and marketing and to client relationship and satisfaction. The seller should always ensure that the buyer is the right sort of person to run the practice successfully and not just accept the buyer because they offered the highest price.

2. Buyers often believe ‘they know best’ and no sooner take over the business than they start to change things. A sensible buyer should run the business as they bought it for at least 6 months to fully understand how it operates and why it has been successful before they start making changes. A buyer who moves the location of the business, changes its name, terminates or changes long-serving staff or immediately increases fees is asking for trouble. The seller should get a commitment from the buyer to operate the business in the same way it has always been run until the retention period runs out.

3. Buyers often bite off more than they can chew. If a buyer already has a practice the seller should ensure that the buyer will be able to service both practices properly. If this is the buyer’s first practice the seller should ensure the buyer is up to the task of running a private practice of this kind. Experience in a big accountancy firm, a big company or, god forbid, in a government department is no guarantee that a buyer will be able to run a small private practice.

4. The 80:20 Rule applies in small practices so that 80 per cent of the work will come from 20 per cent of the clients. Indeed it can be even more restricted than that so if a major client leaves it will be a huge blow to the practice revenue. Both buyers and sellers should understand what it will take to ensure that the Top 10 clients of the practice stay with the buyer and don’t take the opportunity to go elsewhere.

5. The biggest single reason that the practice revenue decreases after sale is the drop in client service. It is very common to speak to unhappy customers of the practice who say that the buyer never contacted them, did not return calls either promptly or at all, was not timely in their work, got things wrong, did not understand their business … and so on. Sellers should discuss the required service levels with potential buyers so that the latter knows what will be expected and does what’s required to keep clients happy.

If a seller wants to be paid the retention sum (and some don’t, happy that they sold the business for the upfront payment alone) they need to safeguard against all these issues. Perhaps the best way is to work for the buyer as an employee for the retention period to help the buyer adjust and to ensure the handover of the practice during that important retention period.

Peter Townsend is a business lawyer with over 30 years’ experience in providing legal advice to participants in the financial planning and securities industries. Peter is a graduate of Sydney University in Arts and Laws and is a member of the FPA, a Fellow of the Institute of Company Directors and a Fellow of the Commercial Law Association. He is Principal of the law firm Townsends Business & Corporate Lawyers and Managing Director of SUPERCentral Pty Limited, a leading automatic, online SMSF deed update service.